Forks, BIPs, and the Dog Days of Summer

“Sell in May and go away” is an old adage on Wall Street related to the historic under-performance of stocks over the summer. During my decade working with hedge funds I can attest to a general lull over the summer as traders got in their Ferraris, portfolio managers summoned their helicopters, and the operations teams crammed on the jitney to head out on their annual migration to the Hamptons. Not just a time of under-performance, there was a noted decrease in trading volume and volatility–and low volatility is boring. You could argue selling in May (or more like June) in the cryptocurrency markets would have been a good strategy in 2017, but one thing is certain: August and the rest of the summer will NOT be boring.

Over the next weeks and months there ARE GOING to be changes to the Bitcoin protocol by various groups. These changes may catch on, fall flat, or trundle along with some support by a portion of the Bitcoin community. There are different groups involved and they all think they have the answer to the question–how should bitcoin scale to increase adoption? Since no one “owns” bitcoin no ONE person can dictate how it should change. I won’t get into all of the terminology, groups, motivations, and technical specifics – there are plenty of resources breaking all of that down. What I think is lacking is a simple answer for the question many casual Bitcoin holders are asking themselves.

What the hell should I do through all of this?

To set the stage–ANYONE can change the Bitcoin code since it is open source. For Bitcoin as we know it to change, a majority (preferably a large one for clarity’s sake) of participants in the network need to agree with the change and start running the new code. Bitcoin isn’t running on one server; it’s running on thousands of distributed nodes, and those nodes work together keep the wheels turning.

Map of active bitcoin nodes (https://bitnodes.21.co/) as of 7/27/2017

All of this grandstanding is basically different groups trying to convince all of the other groups that their code is the best way to scale Bitcoin. ONE important piece to call out is that there are some time-locks on some of this code (some of it is coded in, some of it signaled “promises”) and THAT is why you keep hearing about August 1st. One of the groups is going to start running their code hell or high water on that date unless something drastic happens. I see this breaking down into basically 3 scenarios. These are not just in relation to the Aug 1st change but to any of the proposals that are coming up.

The large majority of participants in the network like the change, begin running the updated code, and voila! Bitcoin has been changed. Anyone still running the old code are basically supporting a new token that doesn’t have value because the overwhelming majority of the network is running the new code.

Participants in the network don’t really like the change, so no one updates their code. Anyone running the new code is basically supporting a new token that doesn’t have value because the overwhelming majority of the network is running the new code.

The split is closer to 50/50 and there are now two tokens claiming to be Bitcoin. Which one is Bitcoin in this instance? No one knows! Time may or may not tell.

There are some nuances with the current situation:

Some changes are backward compatible (you can still participate in the network without running the new code, but you may not be able to process ALL transactions). That prevents the #3 scenario even in a closer to 50/50 environment.

Some changes need a predetermined percentage of the network to be running or signaling that they will run the updated code to be rolled out. This is done to try and avoid #2 and #3.

Some changes have a time lock – they WILL be rolled out at a certain date by those signaling they are running an update. This is what has created the August 1st deadline you have heard so much about.

This is also not a binary situation. It is not one Bitcoin or two Bitcoins. There are projections where there are up to five by the end of the year. The takeaway here is that if you own your private key (most independent wallets, not exchanges), no matter how many bitcoins there end up being you will end up with an equal amount of each token (if you have 5 BTC now and it splits to BTCa, BTCb, and BTCc, you will have 5 BTCa, 5 BTCb, and 5 BTCc).

So, what should you do?????? Check out my chart below for how I would approach the question. I can’t tell you what is right for you. You will need to weigh your capacity for risk, confidence in bitcoin, ability to actively trade trading, and technical proficiency.

Personally, I am still very bullish on bitcoin for the long term and I am not a fan of actively trading since I have a day job, so I will be riding out the storm with most of my bitcoin in GreenAddress and JAXX wallets with some staying at Coinbase. I will not be sending, buying, selling, or doing anything else else with my bitcoin till there is a clear picture of what the future looks like.

I know Coinbase has its warts, but I have met a number of folks that work there. Their office is just a couple blocks away from mine. Most importantly, they seem determined to be the leader in bringing cryptocurrencies out into the open. Love them or hate them, you can’t argue the fact that Coinbase is THE EASIEST way to buy your first bitcoin. They are working closely with US regulators and they are heavily incentivized to provide reasonable guidance through this process. Right now they have stated that on Aug 1st–and possibly for a while after–deposits, withdrawals, and trading of Bitcoin will be frozen. Once the dust settles they will take the appropriate actions to update balances.

On August 1st we won’t have an answer. We will have some more information, but there will likely be looming changes or forks through the end of the year. How much the anticipation or implementation of these changes affects the price and/or utility of bitcoin remains to be seen. Only one thing is guaranteed–everyone will not be happy.

There will be winners, losers, and a lot of folks in the middle so even if the fireworks are more this:

and less this:

there will be plenty of groups still making a lot of noise.

It will be a very interesting test of how fully decentralized systems deal with making such an important change, so double check your holdings, sit back, and get ready for the show.

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